Information Exchange and Tax Haven Investment in OECD Securities Markets

Exploiting rich International Monetary Fund (IMF) data on bilateral portfolio investment stocks, we document that tax haven-outbound foreign portfolio investment (FPI) in Organisation for Economic Co-operation and Development (OECD) securities markets shows a significantly different response to tax information exchange as compared to outbound FPI from nonhavens. This is evidence of a tax evasion component in tax haven portfolio assets located in the OECD. The total effect of a new information exchange agreement on the stock of haven-outbound FPI is approximately -3.5 percent, on average, but with considerable variation across the 21 tax havens included in this study. Bahrain, Jersey, and Macao show the strongest declines in outbound FPI holdings after increasing transparency through additional information exchange agreements, followed by the Bahamas, the Cayman Islands, the Isle of Man, and Singapore. Our results suggest that tax havens signing a new agreement experience, on average, a reduction of their U.S. portfolio assets by approximately $2.3 billion and a reduction of their U.K. portfolio assets by approximately $1.9 billion. Moreover, we find traces of round-tripping tax evasion, whereby investors put their money in tax havens just to invest it back in their home countries in equity investment, whereas other routes of tax evasion seem to open up primarily in debt FPI. If a tax haven signs a new information exchange agreement with another tax haven rather than with a nonhaven partner, we identify, ceteris paribus, a positive investment response.